Fed holds line; rate hikes still on the table

The Federal Reserve opted not to raise interest rates at its January meeting and gave no indication that it was changing course on its rate-hiking path ahead.

Amid substantial turmoil in financial markets, the Federal Open Market Committee statement issued Wednesday did say it was “closely monitoring global economic and financial developments,” referring to the volatility that led most of Wall Street to dismiss the possibility of a rate hike this month.

Major stock averages sold off immediately after the statement as Wall Street parsed out Fed language for how hawkish the U.S. central bank will be through the rest of the year.

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“It’s the tail wagging the dog. If the market stabilizes, the Fed will hike,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. “The problem is, the markets are looking for some certitude and they can’t get it. That’s the problem with data dependency. It means different things to different people. The inability of (Fed Chair) Janet Yellen to articulate this is going to be a growing source of concern for markets.”

There were a handful of changes to the Fed’s outlook, including a lowering of what it considers full employment, dropping that figure to 4.9 percent, which is just below the current rate of 5 percent.

In addition, the committee did indicate some additional concerns regarding inflation, though it considers current conditions transitory. The committee “would be concerned” if there were signs that inflation was “running persistently above or below this objective.”

The policy is “in line with dovish expectations,” said Kathy Jones, chief fixed income strategist at Charles Schwab. “If there’s anything to hold onto, it’s the statement about inflation. That’s a relatively new indication of concern that maybe they’re missing that target over a longer period of time. That would argue for easier policy. That’s kind of a new perspective for them.”

The document noted that while economic growth is slow, labor conditions are improving and the persistently low level of inflation would change. Fed officials maintained their belief that the ongoing plunge in energy prices is merely “transitory” and will pass in the medium term.

The statement said the employment outlook “improved further even as economic growth slowed late last year.” Fed officials believe the labor market has tightened though there is little indication of wage inflation.

“Inflation is expected to remain low in the near term, in part because of the further decline in energy prices, but rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further,” the statement said.

The Fed’s decision comes with investors on edge due to a nearly relentless market decline since the last FOMC meeting. The statement did say the central bank was “closely monitoring” conditions.